The 'completion' fee chargeable by a CMC would be capped at 15%, including VAT, or £300 for high volume, low work 'bulk' claims in relation to mis-sold payment protection insurance (PPI) or packaged bank accounts (PBAs), and at 25% including VAT in other financial cases. CMCs would also be banned from charging upfront fees in financial cases; and from charging individuals if no relationship is found between that individual and a lender.
The proposals, which were trailed by the UK chancellor as part of the 2015 Summer Budget, are designed to protect consumers from high charges as well as "reduce the level of speculative claims lodged with lenders and the Financial Ombudsman Service" according to a Ministry of Justice (MoJ) consultation, which closes on 11 April. Consumers are typically charged around 25%-30% of the final compensation awarded by CMCs, with some charged as much as 40%, according to the consultation.
"It is important that consumers who decide to use a CMC to pursue a financial claim receive better value for money and are not taken advantage of by companies that may add very little to the claims process in practice," the MoJ said in its consultation paper.
"Based on the level of evidence available at present, the government considers that further restrictions on charges and the manner in which CMCs can contract with consumers would assist to reduce incentives for CMCs to collect marketing leads, and expects that the number of nuisance calls and speculative claims would be reduced as a result. In turn, we expect that the administrative and financial burden placed on lenders and the Financial Ombudsman would be lessened and the cost of these claims to the industry diminished," it said.
CMCs handle claims for compensation on behalf of consumers, but some have been criticised by consumer protection groups for poor practices and for not being transparent with regards to fees. There are currently around 1,700 regulated CMCs, around 850 of which handle financial claims, operating in the UK, according to figures from the Claims Management Regulator.
The MoJ's proposals would be implemented through the 2014 Conduct of Authorised Person Rules (CAPR), which apply to all regulated CMCs. However they would only affect financial claims and not, for example, personal injury claims brought by CMCs on behalf of consumers. Fees chargeable in PPI and PBA cases would be capped at 15% of the net amount of the final compensation claimed from a single lender where the total net value of all claims was £2,000 or less; or at £300 including VAT where the total value of all claims was over £2,000.
'Cancellation' fees chargeable by CMCs dealing with PPI and PBA cases where a consumer cancels their contract after the initial 14-day 'cooling off' period would be capped at £300, backed by a new requirement that all charges be "reasonable" and the CMC provide the consumer with an itemised bill setting out details of what the charges relate to. CMCs would also be banned from charging any fees to consumers if it later emerges that the consumer had no relationship with the lender, and from receiving or making any referral or introduction fees in relation to PPI or PBA consumer claims.
The consultation also proposes capping fees charged by CMCs in any other financial case at 25% of the net amount of compensation awarded per product, including VAT. Charging upfront fees to consumers for the pursuit of any financial claim would be banned.
The MoJ said that the level of work required by CMCs in order to pursue different types of financial claims could "vary greatly", which explained the differences in its proposed fee caps.
"There are some types of bulk claims such as [PPI] and [PBA] claims that, in the vast majority of cases, do not generally require a significant amount of work to be undertaken to pursue, particularly when compared with more complex claims matters in the financial claims sector," it said in its consultation paper. "In fact, there are a range of resources available that enable consumers to bring claims themselves, free of charge."
"There are also more complex cases where relevant sector knowledge is likely to be required and where a significant amount of work and investigation is conducted to ascertain whether a consumer has a potential claim. These more complex claims can range from mis-sold pensions and mortgages to interest rate swaps and other complex financial matters. The value of using a CMC to pursue these types of claim is much clearer, as relevant knowledge is used to understand and challenge the nature of more complex claims matters," it said.
The Financial Conduct Authority (FCA) is intending to introduce a deadline by which consumers who believed they were entitled to claim compensation for mis-sold PPI from their bank or building society would have to make that claim. The deadline would not be introduced before 2018 and would be preceded by a £42.2 million consumer communications campaign, led by the regulator and funded by the 18 firms responsible for over 90% of PPI complaints, according to last year's consultation on the plans.